An Analysis of Business and Financial Performance of Nishat Textile

Part 1: Introduction Of Nishat Textile Mills

1.0: Introduction

In this section, introduction, brief profile, vision of Nishat Textile Mills Industries Limited (hereafter referred as “NTML or NML”) will be given.

1.1: Profile of NTML:

Nishat Mills Limited (NML) commenced business in 1951 when Mian Muhammad Yahya founder of NML start it operation as a partnership concern, which was converted into private limited company in 1959. In 1961, the company went public and was listed on the Karachi stock exchange, the only stock exchange in the country at that time.

NML started out as a weaving unit with 500 semi-automatic looms; later 10000spindles were added, laying the foundation on nation’s biggest textiles composite project. Composite project at Nishat mills limited Faisalabad covering 98 acre of Landis providing all production process under one roof i.e. spinning, weaving, processing, stitching and power generation.

1.2: Vision:

The vision of NTML is:

To transform the Company into a modern and dynamic yarn, cloth and processed cloth and finished product manufacturing Company that is fully equipped to play a meaningful role on sustainable basis in the economy of Pakistan.

To transform the Company into a modern and dynamic power generating Company that is fully equipped to play a meaningful role on sustainable basis in the economy of Pakistan.

1.3 Mission:

To provide quality products to customers and explore new markets to promote/expand sales of the Company through good governance and foster a sound and dynamic team, so as to achieve optimum prices of products of the Company for sustainable and equitable growth and prosperity of the Company.

1.4 History and Current State:

Nishat mills was established in 1951 by Mr.Yahya. It developed by leaps and bound and in mid 70s it start export to Africa and others countries. In 80s export printing material to Europe and grows rapidly. Today Mian Mohammad Mansha, the chairman of Nishat Group, like his father, continues the spirit of entrepreneurship and has led the group to become a multidimensional corporation.

Nishat has grown from a cotton export house to big 5 listed companies, concentrating on 4 core business, Textiles, Cement, Banking , and Power Generation. Today, Nishat is considered to be at par with multinationals operating locally in terms of its quality products and management skills.

1.4.1: Textiles:

Production process consists of spinning, weaving, processing, and finishing. The processing includes dyeing, engraving. An addition of 20000 new spindles, 100 new air jets looms and new dyeing plant has increased the existing capacity of 24000 spindles, 740 looms and dyeing and finishing capacity of 5 million meters which is highest in the country. Its annual turnover for the year is over Rs.17 billion. The group is the largest exporter of textile products from Pakistan for more than a decade.

1.5: Industry overview

Pakistan ranked forth largest producer of cotton in world according to tax index. Textile sector contributes 7 billion investments in textile sector along with 50% export of Pakistan. In 2009 textile sector contributes 9.48 $ billon in export of Pakistan.

The good quality fabric of Pakistan recognized worldwide and shows great demand of our textile products. The demand of textile rises round about 3% that shows greater opportunity. Government has also provided the benefits to textile sector in order to boost the textile economy.

The 7 textile exhibition in 2010 have enhance the textile sector. More than 300 international and local exhibitors are participating in Textile Asia an increase of more than 70%from last year. This participant includes our own textile firms that have increased the demand and repute of our products in international market. Collectively the signs are encouraging for the textile industry of Pakistan.  It is important that wise decisions are made in view of the changing global scenario in order to meet the demands of the future adequately and successfully.

According to president of all Pakistan Textile Mills government should reduce the tax rate interest on import of textile products and provide privilege to the exporter to boost this industry.

Part 2 : project objectives and overall project approach

2.0:Reason For Choosing Particular Topic And Organization

2.1: Reason for Choosing Topic:

In my study here in University I have done many projects but never get a chance to do ratio or performance analysis of any firm. So, when Sir Khurram Fani provides us opportunity to select any topic we prefer this one.

Secondly this topic is quite much useful and realistic in our professional life and last reason of selecting this is it will provide us the knowledge to ascertain what financial situation of different firms in market is and which firm is better to invest or consider for job purpose or for business.

2.1.2: Reason for Choosing Organization:

Textile sector is the most growing industry in Pakistan so I want to select a textile firm. I have selected the Nisha mills because it is member of one the famous and renewed Nishat group of Pakistan. Whose success is famous in south Asia and the personality of Mr. Mansha also influence me to choose this firm.

Lastly I have interest in exporting apparels cloths and garment in future. It will help me learning the quality of product required for export, market information, demand and experience before conducting my own business.

2.2: Research Aim, Objectives and Questions

It is necessary for attaining success in any field that we are clear about questions planning objects techniques and purposes of our research. That is:

2.2.1: Research Aim:

The aim of this project is to analyze the business and financial performance of Nishat Textile Mills Limited from July 1, 2008 to June 30, 2010. As well as to attain information regarding the factors necessary to attain success in textile sector and what is the thing that makes you indifferent from other firms in same industry.

2.2.2: Research Objectives:

The objective of our project is to critically analyze the business and financial performance of the selected company from every possible aspect like profitability, efficiency, solvency position of Nishat Textile Mills Limited by using different models presented by different authors.

2.3: Overall Research Approach:

The overall project approach includes background nature of firm and industry. We are using different research techniques that include ratio analysis, Porter’s five forces model (1979), PEST analysis for business and for measurement of performance, horizontal and vertical analysis of Nishat Textile mills limited.

The project aim, objectives served as a framework in which work was carried out. The findings section of this report will give an account on achievement of research aim and objectives. This will be followed by conclusion and recommendations.

Part 3: Information Gathering

3.1: Sources of Information:

The conduct of this project required data collection from various sources that includes primary and secondary sources. Primary sources include internet friends and all tools that students used to get data. Secondary sources include the persons that directly or indirectly relates to Nishat. We have also gather data from other individuals who have good information of market.

3.2: Limitations of information gathering:

Data is collected from the representatives of company, reports, magazines, library and other sources which may or may be more accurate as there may be factor of biasness or material irregularity. The time line available for collection of data is very short that create hurdle regarding reliability of data. Resources available to us regarding collection of data are not sufficient so, accurate information may not be attained. The persons selected for collection of information may not true representative of the company.

3.3: Ethical issues:

One of the most issue arose was it may move to the negative publicity of the company that can be arouse. It is our responsibility to hide the information of personnel from whom we have collected the data.

Final report of the project should be present to management for removal of any material mistake and save repute of the company.

Part 4: Business Analysis Techniques

4.1: SWOT Analysis:-

SWOT analysis is deal with analysis of business with its external environment. SWOT stands for Strength Weaknesses Threats and Opportunities. Weihrich suggested in 1982 that S&W represents the internal environment whereas OT comes from the external environment. Kotler in 1998 suggest that organization should carefully use the SWOT analysis as it represent that which opportunity should business avail and which should not be avail. Organization should conduct SWOT analysis for evaluation of organization resources & culture and to make strategies to fit amongst the benefits of external environment. Thus entire analysis of SWOT represents the Strength Weaknesses Threats and Opportunities that a business face in the environment. The only limitation in SWOT was presented in 2006 by Lin & Newkrik that environmental uncertainty restricts organizations ability to forecast future and reduce the effectiveness of SWOT analysis. Similarly Li and Lin also showed their concerns about the quality of information in an uncertain environment thus restricting the use of SWOT analysis.

4.2: Pest analysis:

Pest refers to political, economic, social, technological means the external environments in which exist. We analysis a business that how it is or it should respond to all these four factors. The PEST analysis is a useful strategic tool in order to understand market growth or decline, business position, potential and direction toward operations. PEST provides a framework for reviewing a situation, which can be applied by companies to review strategic directions, including marketing proposition. PEST also helps business to evaluate that whether the company’s performance is positively aligned with the powerful forces of change that are affecting business environment.

4.3: Porter 5 forces model:

Michael porter an authority on competitive advantage contends that a corporation is most concerned with the intensity of competition within its industry. The model is used to understand the competitive landscape of industry.

The forces which are discussed by porter are;

-Threat of new Entrants

-Rivalry among existing firms

-Bargaining power of supplier’s

-Bargaining power of Buyers

-Threat of substitute products

4.4: DuPont analysis:

Dupont analysis is a method of performance measurement that was started by the DuPont Corporation in the 1920s. In order to access the firm’s financial state /condition DuPont analysis is used. It merges the income statement and balance sheet into two summary measure of profitability:

Return on asset (ROA)

Return on equity (ROE)

1st step:

ROA = net profit margin*total asset turnover net profit margin measure the firm’s profitability on sale total asset turnover indicates how efficiently the firm has used its asset to generate sales and the product of these two ratios results in the return on total assets(ROA).

2nd step:

ROE= ROA*FLM

FLM is the financial leverage multiplier which is the ratio of total asset to common stock equity. FLM is used to convert the ROA into the ROE that reflect the impact of financial leverage on owners’ return.

DuPont system allows the firm to break its return on equity into three components, profit on sales, efficiency of assets used, and a use of financial leverage component. And these dimensions are used to analyze the total return to owners.

It’s a way of tracking the possible problem back to its cause:

Slow collection of accounts receivable Low ROE

High level of receivables high level of total asset

Slowed down

Driving down its ROE Total asset turnover

4.4: Ratio analysis:-

Single most important technique of financial analysis in which quantities are converted into ratios for meaningful comparisons, with past ratios and ratios of other firms in the same or different industries. Ratio analysis determines trends and exposes strengths or weaknesses of a firm.

Part 5: Findings and Interpretation

5.1.0: Nishat SWOT analysis:

Our findings relating the Nishat SWOT is:

5.1.1: Strength:

The major strength of Nishat is that its ideal location in the heart of Faisalabad. Faisalabad is famous for textile sector all over the world.

Availability of cheap labor and technical expertise and high quality machinery gives Nishat a strong position market.

NTML is part of Nishat groups that provides opportunity to produce own raw material provide financial assistance and good management that results confidence of customers, efficient working of NTM and cheaper products.

Good quality control system, ISO certified make good reputation of Nishat and provide the big renowned long term customer to the company.

5.1.2: Weaknesses:

NTML is using centralized management decision making that burden the management and results inefficiency.

If imported machinery or any part went out of order then takes time to correct it that results suffer in productivity, time and cost.

High salaries of management and low salaries of workers create ethical issues that results high turnover of workers and reduce motivation.

NML is paying at the normal wage rate for overtime while the overtime rate is always high in all the organizations. Lack of planned HR structure.

5.1.3: Opportunities:

Due to WTO establishment and fulfilling all its requirements brings opportunity of economies of scale and conduct international business.

ISO 14000 certification improve image of Nishat and brings international market.

Have capacity to expand in terms of products and markets.

5.1.4: Threats:

Globally Economic instability create problem that includes dumping. After 9/11 fore nor never prefer Pakistan products.

Political insatiability create safety threat for firm

Buyer demands is changing day by day that requires innovation but Nishat does not have that research.

5.2: Nishat pest analysis

5.2.0: Findings/results:

Following are the findings of PEST analysis:

5.2.1: Political Instability:

Unfortunality the Pakistan is one of those countries which always face the political instability and this rapid change in trade policies every time while Government changes are a great hurdle on the path of development. Government should apply sustainable policies for the beneficial of the exporters as well as the investors.

5.2.2: Economic situation:

Now a days the economic condition of Pakistan also affecting the manufacturing process, by increase in inflation rate the cost of production increases and in results the profit margin of the investor is also reduces.

5.2.3: Social situation:

The change in the lifestyle of the people affects the growing demand of the NTM products. The change in the lifestyle and needs in different demographics also affect the demand of the customers. Due to all these changes NTM is performing excellent for the excellence organization as well as for the customer.

5.2.4: Technological factor:

To meet the changing requirements of the competent business environment, especially in the textile sector where there is a lot of technological development. Excellent computerized machines and devices are installed in the NTM that has made extension in its present setup by installation of well advanced technology imported from Japan China and France.

5.3: Explaining each of the porter’s model force in context on Nishat mills:

5.3.1: Threat of new Entrants

The threat of entering new firms always remain in market not for only nishat mills but the other firms also, So to defend themselves from this threat they gain economies of scale and the other barriers which Nishat mills create for entrants are Product differentiation, switching cost.

5.3.2: Rivalry among existing firms

Another threat for Nishat mills is the hyper competition in industry. The firms currently in the industry (Crescent, Kohinoor, other Chunioties) are also create the threat for Nishat mills because the profitability of the Nishat mills affected by their actions Suppose if one competitor reduce the prices so Nishat will also have to reduce which in result will affect the profitability of company.

5.3.3: Bargaining power of suppliers

The bargaining power of supplier also affects Nishat mills profitability in such a way that if supplier increase their prices of raw material so definitely the cost will go up as well. The bargaining power of buyers is also a threat for a firm operating in industry. The buyer affects the profitability in such a way that he wants discounts and other services which might lower the margin of profit for the company.

5.3.4: Threat of substitute products

The substitute product means any product which satisfies the same needs. So substitute products in market are also a major threat for Nishat mills.

5.4: Dupont analysis of Nishat textile

Items

2010

2009

2008

Total equity

31376313

19330767

25147180

Total Liabilities

14806001

12181919

12769399

Total Assets

46182314

31512686

37916579

Net Sales

31535647

23870379

19267633

Net Income

2915461

1268001

6138968

Profit Margin

Assets Turnover

Equity Multiplier

ROP

Net Income/sales

Sales/ Assets

Assets/equity

Items

2010

0.09

0.68

1.47

0.09

2009

0.05

0.76

1.63

0.07

2008

0.32

0.51

1.51

0.24

Items

2010

2009

2008

Profit Margin=Net Income/Sale

0.092

0.053

0.319

Return On assets=Net Income/Total assets

0.063

0.040

0.162

Return On equity=Net Income/Total equoty

0.093

0.066

0.244

Items

ROA

1+D/E

ROE Product

2010

0.063

1.472

0.093

2009

0.040

0.630

0.025

2008

0.162

0.508

0.082

Items

ROA Product

2010

0.063129383

2009

0.040237795

2008

0.161907223

5.5: Ratios Analysis of Nishat:

Following are the ratios that we are calculated from the books of Gittman, Sohail Afzal and Business finance. We have calculated that:

5.5.1: Profitability:

Increase in N.P and G.P due to increase in quality and prices of product. Spinning and cotton prices also played a vital role, due to global shortage of cotton. Weaving segment contributed notably but still under pressure, due to high cost of yarn and cloth purchased. Timely investment in garment Segment Company was able to reduce its financial cost by 28.26% due to subsidy on textile products and Rate by government and more effect funds managements. (March 2009 Rs.1127.4798 million, March 2010 Rs.808.800 millions).

Sales have shown a consistent inclining trend except a decline in 2005 mainly to abolition of MFA agreement. Sales have increased by 12.15% in FY08 and 23.89% in FY09.

Devaluation in rupee against dollar and ample cotton stock resulted in good results during the earlier part of year 2009.

Due to change in marketing strategy NML reduce better quality of yarn having good market demand. This helps NML to get good business orders.

5.5.2: Liquidity:

Liquidity decline in order to fulfill the requirements of IAS-39, market condition and current economic scenario, the company decided to record full impairment of Rs.17.259 million against available for sale security where fair market value is less than their cost as at 30 June 2009. Despite improved revenue the firm has low working capital for short term fun cling nets.

Ratios

Nishat Textile Mills

Limited

Kohinoor Textile Mills Limited

2010

2009

2008

2010

2009

2008

Liquidity Ratios

Current Ratio

1.11

0.86

0.73

0.80

0.758

1.0510

Quick Ratio

0.47

0.38

0.34

0.47

0.4957

0.7456

Solvency Ratios

Debt to equity Ratio

67:33

61:39

65:35

41:35

24:76

36:64

Debt Ratio

0.32

0.39

0.34

Interest Coverage Ratio Or Debt Service Ratio

3.96

2.07

7.43

1.35

0.57

1.14

Activity Ratios

Inventory Turn Over Ratio

4.48

4.18

1.79

4.166

4.17

3.73

Average Inventory Turnover Period

81

days

87

Days

203

Days

88

Days

88

Days

97

Days

Receivable Turnover ratio

5.20

5.83

4.71

8.98

8.06

5.64

Profitability Ratios

Gross Profit Ratio

18.96%

18.23%

14.35%

18.71%

14.89%

15.38%

Net Profit Ratio

10.42%

6.54%

31.23%

2.598%

(5.19)%

(0.046)%

Earnings Per Share

10.5

6.23

36.86

1.91

3.02

0.02

Return On Total Assets

6.31%

4.02%

15.19%

Return On Common Equity

9.29%

6.56%

23.10%

0.16%

(0.26%)

0.00%

Market Ratios

Price To Earning Ratio

1.91

2.29

0.62

2.62

(0.80)

(221.25)

Market Book Ratio

2

2

2

0.50

0.24

0.44

Earning Per Share

10.5

6.23

36.86

1.91

(3.02)

(0.02)

Networking Capital Ratio

0.11

(0.14)

(0.27)

-0.24

-0.20

0.05

Proposed dividend

25

15

25

0

0

0

5.5.3: Activity ratio:

The changes are indicator of better inventory management efficient credit policy towards the debtor.

5.5.4: Solvency ratio:

The debt burden the company reduced over the past 8 year. The fall in equity is on the back off shrinking an appropriate profit which was eroded by the impairment cost. Long term debt to equity increased interest earned ratio has deteriorated showing Strain Company ability to meet its short term interest charges.

The company acquired 1 million loans from Habib Bank (KIBOR).

5.5.5: Market ratio:

The price to earning ratio shows a positive surge despite the prevalent uncertain market condition. The book value of share shown a decline due to increase in no of outstanding share.

Financial Highlights

Financial Statement

2010

2009

2008

2007

2006

2005

Income Statement

RS.

RS.

RS.

RS.

RS.

RS.

Net sales

31,535,647.00

23,870,379.00

19,589,804.00

17,180,192.00

16,659,607.00

11,374,630.00

Gross Profit

5,980,185.00

4,351,541.00

2,811,746.00

2,844,938.00

2,957,981.00

2,134,899.00

Profit before Tax

3,286,069.00

1,561,501.00

6,118,687.00

1,356,208.00

1,758,866.00

2,033,356.00

Profit after tax

2,915,461.00

1,268,001.00

5,857,587.00

1,211,208.00

1,632,866.00

1,867,354.00

Cash Outflows

Tax Paid

343,036.00

257,289.00

238,252.00

146,751.00

196,772.00

116,675.00

financial Charges Paid

1,096,389.00

1,458,602.00

875,636.00

838,759.00

692,267.00

351,094.00

.fixed Capital expenditure

1,955,703.00

917,312.00

1,239,492.00

1,076,493.00

2,331,519.00

1,743,535.00

Balance Sheet

Current Assets

11,732,928.00

8,294,838.00

8,818,397.00

13,309,087.00

9,743,720.00

7,746,417.00

Current Liabilities

12,568,415.00

9,602,265.00

12,053,926.00

7,649,373.00

7,051,533.00

6,253,333.00

Operating Fixed Assets

11,476,005.00

11,102,355.00

11,188,560.00

10,309,611.00

8,398,310.00

7,926,838.00

Total assets

46,182,314.00

31,512,686.00

40,277,289.00

39,587,091.00

30,661,326.00

21,917,602.00

Long Term Loans & Finance

2,980,694.00

2,334,411.00

1,321,912.00

1,773,820.00

3,015,384.00

2,858,155.00

Shareholder’s Equity

31,376,313.00

19,330,767.00

26,492,070.00

301,163,898.00

20,594,409.00

12,806,114.00

Ratios

Current ratio

1.11:1

0.86:1

.73:1

1.74:1

1.38:1

1.24:1

gearing ratio

25.53

34.34

30.62

21.17

29.49

37.7

Gross Profits ratio

18.96

18.23

14.35

16.56

17.76

18.77

Net Profit before taxes

10.42

6.54

31.23

7.89

10.56

17.88

EPS

10.5

6.25

36.86

7.58

10.22

12.86

Proposed Dividend

25

20

25

25

15

25

Bonus

10

The significant increase in gross profit and net profit is mainly attributable to increase in sale quantities, good sales mix of products and increase in prices of the products manufactured and sold by the Company. All business segments of the Company have been able to realize benefit from the slightly improved economic scenario during the current year for the textile sector of the country compared to the corresponding previous year and have contributed towards the excellent results. In particular spinning and garment businesses of the Company has performed tremendously well in the current year by generating higher margins. Our spinning business through effective planning, timely investment in cotton and excellent production facilities has grasped optimum benefits offered by the sharp rise in demand of cotton yarn and its selling prices even though later in the year the sales margins were affected by imposition of additional duties by the Government. Our timely investment in garments segment has started showing positive results in the current year and it has shown a growth in revenue and gross margin of 107% and 335% respectively.

The significant increase in sales in 2010 by 32.11% over 2009 is in line with the Company’s commitment to year on year growth trend in sale quantities together with the significant increase in sale prices. It is worth mentioning here that our garment sector has shown more than 100% increase in sales in 2010 over 2009.

Part 6: Trend analysis/Common size analysis of NTML:

Common size analysis expresses comparison in percentages. It makes analysis of different sizes of the firm more meaningful.

6.1: Horizontal Analysis

Horizontal analysis compare each year with the base year and thus making comparison of different items in different years easy and meaningful. We have taken 2008 as base year and then compared each year’s figures with respective items in proceeding year.

6.1.1Horizontal analysis of Nishat Textile:

Financial Statement

Financial Statement

2005

2006

2007

2008

2009

2010

Income Statement

%

%

%

%

%

%

Net sales

100

46.46

51.04

72.22

109.86

177.25

Gross Profit

100

38.55

33.26

31.70

103.83

180.12

Profit before Tax

100

-13.50

-33.30

200.92

-23.21

61.61

Profit after tax

100

-12.56

-35.14

213.68

-32.10

56.13

Cash Outflows

Tax Paid

100

68.65

25.78

104.20

120.52

194.01

financial Charges Paid

100

97.17

138.90

149.40

315.44

212.28

.fixed Capital expenditure

100

33.72

-38.26

-28.91

-47.39

12.17

Balance Sheet

Current Assets

100

25.78

71.81

13.84

7.08

51.46

Current Liabilities

100

12.76

22.32

92.76

53.55

100.99

Operating Fixed Assets

100

5.95

30.06

41.15

40.06

44.77

Total assets

100

39.89

80.62

83.77

43.78

110.71

Long Term Loans & Finance

100

5.50

-37.94

-53.75

-18.32

4.29

Shareholder’s Equity

100

60.82

2251.72

106.87

50.95

145.01

Nishat Textile Mills Limited

Balance Sheet

As on June 30th 2007- June 30th 20

Liabilities

(Rupees in Thousands)

2010

2009

2008

EQUITY AND LIABILITIES

%

%

%

SHARE CAPITAL AND RESERVES

Authorized share capital

1,100,000,000 (2009: 1,100,000,000) ordinary

shares of Rupees 10 each

516.35

516.35

100.00

Issued, subscribed and paid up share capital

120.04

51.75

100.00

Reserves

18.31

-28.21

100.00

Total equity

24.77

-23.13

100.00

NON-CURRENT LIABILITIES

100.00

Long term financing

184.47

122.79

100.00

Deferred tax